Bankrupt by 21 years old – whose fault is it?

The concept of filing bankruptcy has changed significantly in face value over the past couple years. Ten years ago, one would have looked at bankruptcy as the worst possible thing anyone could ever do to themselves. It meant losing everything, and never recovering. Then, a couple years ago, people started using bankruptcy as an easy way out of debt. Sometimes choosing chapter 7 and other times chapter 11 depending on their liquid assets and ability to repay their debt. So many people started doing this, that the government accepted the new “Bankruptcy Law,” that essentially put a stop to “bandwagon bankruptcy.” I call it that because that’s what it had become – well everyone else is doing it to get out of debt and they seem to be fine, I guess I’ll do it to!

The question that needs to be asked though is how did so many people get in so much debt that this even started happening? Isn’t there something governing and controlling how easily people can be given the opportunity to increase their debt? Well sure, there is our credit score, but even that sometimes has no effect on what a person can do. So who’s to blame for all our debt, and all the bankruptcy? Is it the consumer, or the companies that provide the credit in the first place? Of course your immediate answer is the consumer, as they should have had the self-control to not get into their financial mess in the first place. Before you agree with that statement however, take a look at the whole picture.

A credit card is usually a person’s first experience with credit, and the ability to acquire debt. Typically as soon as someone turns 18, they are bombarded with offers for credit cards, student credit cards, special “gas” credit cards, and “first-timer” cards. This is a great thing in the sense that one can start building credit early in life, but with that comes many dangers that can quickly out weigh the pros if not handled properly. Let’s say you were given a piece of plastic and told nothing more than “this card is worth $500 dollars, you can spend it on anything you want, and you don’t even have to pay it back right away! Just give me $10 a month until you get around to paying it off. Infact we will even raise that amount to $1000 in a couple months, and heck while we are at it, why not give you $5000 to play with.” Well if that’s all you were told, you would be excited and grateful for such a generous offer of course! At this point you might be saying “C’mon, everyone knows there is interest, and that you need to pay off your balance in full, and if you miss a payment they will default you to a 30% interest rate, and if you use your card too much and carry a high balance you will get a bad credit score, and you CAN go over your limit and get charged $30 or more, and there could be a membership fee or annual fee…..” Now just wait a minute and read that again. Do you really think every 18 year old that just got a credit card offer in the mail knows everything I just listed? Regardless of how smart you are, if no one tells you about something, you are not going to know, at least not until it’s too late. The worst part is, this is just credit cards I’m talking about, and that’s only the tip of the iceberg.

So what iceberg am I talking about? I’m talking about the one that sank my financial ship, and the same one that sank so many others by the age of 21. In the three years from 18 to 21 it is possible for someone to acquire so much debt, that they are forced into bankruptcy as an only way out. So how does it start? It starts with the credit cards as mentioned above and moves into greater things like installment loans, say for a car for example. Why is it that an 18 year old student with no full time job and an income of maybe $18k a year can buy a $20k car if they like? All they need is a signature worst case, regardless of the obvious cold hard numbers that say its impossible to afford. After the installment loans its school loans, and not the typical Stafford loan that everyone needs and gets. I’m talking about those special loan offers that come to the student giving them $10k plus, to spend on whatever “school related” things they need. So even though I didn’t need that $2000 computer, I might as well get it now that I don’t have to pay for it until I’m out of school. How about a new wardrobe while we are at it, since I need that for the new semester. What those loans don’t tell you however, is that even though you don’t have to pay them off until after graduation, they are still accruing interest all along the way, not uncommonly at  a rate of 10% or more. This also typically applies to any student loan that is not a government loan, and even then sometimes they incur interest while you are in school (usually at a much lower rate however). So what happens when you add it all up? Pure disaster.

At the age of 21, I had incurred over $80k in debt. Meanwhile, only attending 1 ½ years of school, so only 1 ½ years worth of school loans, which by the way, kick in as soon as you drop out of school, regardless of your reason (ff course there is forbearance and deferment, but interest is always involved). So where did it all come from? A little bit of everything, and a bad downward spiral. Once the credit cards got to high to pay, and the car payment got to extreme, one can simple apply the formula for compound interest to everyone he/she owes because that’s what is going to happen, and fast. I would love to find a mutual fund, or an investment property that grew as fast as my debt did once I slipped the first time on my payments, but it’s not going to happen, that kind of growth only happens if you are in the credit business.

So in the end I was forced into bankruptcy even with the new law intact. After credit counseling and debt management, there was no way of climbing out of my hole. After going through this, I did a little research and found I was not alone, and not the idiot I thought I was. There are thousands of young adults who went through the same thing, and ended up in the same mess. And so brings me back to my original question; who’s to blame, the consumer or the credit companies? I believe it is not wholly one of the other. I believe it is the consumers fault for not providing education to other consumers while still in high school. I also believe it is in part the fault of the credit companies and their willingness to get rich off of others, regardless of their age and the potential outcomes. There needs to be more regulation, and there needs to be more education. My goal in this article is not to bash the credit companies, or to point blame at anyone in particular. Rather, I just wanted to share me story with others, and the things I’ve learned through trials and tribulation. Hopefully this will help in some way save others from the mess I’ve encountered.

I’ve compiled a website to help with all Debt related issues. It is a free ad-supported site, so feel free to read some of the articles and check out some of the links I’ve collected. The address is www.TacklingDebt.com